The reason why a hardware wallet is very important is because in crypto you and only you are responsible for your coins private keys which give complete access to your funds. If you are planning to get in the world of crypto and Bitcoin it is very important to keep your keys safe. As of today there is no safer place to keep your private keys than in a hardware wallet.
In a hardware wallet your private keys are always stored in the device, the cannot be seen, hacked or used without your permission. The only way to gain access to your device is by physically entering the PIN number using dedicated switches to select each number on the device or by using the 24-word recovery phrases you get when initializing the device. To learn How to Set Up a Hardware Wallet Click Here.
In traditional currencies if you have a bank account and for example you lose your ATM card, Credit Card, or lose your checking account information to be able to get access to your account you would head to one of your bank’s branches and with an ID and following the bank’s security procedures you can gain access to your account. The bank’s customer representative would ask you a couple of questions and after verifying your identity all the problem would be solved.
In cryptocurrencies the case is very different. The only ID that is needed to send, receive, or claim funds is your private key. If your private key is lost there is no branch or customer representative that would help you get your funds back.
The only proof of ownership of any crypto assets is your private keys. If someone steals your keys and transfers the funds to another address or wallet those funds are gone, you cannot go to the police or law enforcing agency to ask them to get your funds back.
In crypto transactions are only one-way they cannot be reversed, once you hit that send button and a transaction is confirmed those funds are gone, just as email is also a one-way transaction, once is sent, the is no going back.
As mentioned in the article Types of Hot and Cold Wallets in any software wallet that is connected to the internet your private keys are at risk because there is a big chance of your funds being lost due to hacking, spyware, or computer viruses that could get a hold of you keys and transfer the funds to other wallet.
To understand how a hardware wallet works it is important to know that it consists of two parts. The first part is the actual hardware that makes up the device which contains integrated circuits that are instructed to run an algorithm that generates and stores private and public keys, and the second part is the software or app that is installed in the computer to be able to communicate and provide an user interface so that transactions can be performed easily and securely.
You might be asking yourself if a hardware wallet is so secure, but it connects to a computer which is connected to the internet, how come hackers cannot get to it or viruses and spyware steal the private keys from it. Let me explain how this works.
Hardware wallets such as the Ledger Nano S are designed and constructed around secured chips like the STMicroelectronics ST31H320 which is the same type of chip used for secured IDs and banking applications. These secured chips are tamper resistant because each one has a unique encrypted key which checks its integrity each time the device is turned on. The chip cannot be counterfeited thanks to the encrypted key.
All the information they handle is encrypted using the most secured encryption algorithms that can be up to 4096 bits long. In simpler words this means that the chip that handles your private keys is virtually unhackable.
Added to that robust security these chips are completely isolated from outside communication. All the processing needed to generate the public, private keys and ownership verification happens inside the chip, and in order to receive communication from the user it uses 2 switches that allow the user to select and control what is happening. The user must physically press the switch to accept or reject a transaction. No hacker can press the switch unless is physically there to press the switch.
Also, everything is visible on the device’s screen. Each time you send funds the screen shows you the address to where the funds are being sent. After the user verifies that the address is correct, a button is pressed to accept the transaction.
Even though this is a bit technical for the average user, the truth is that the security features provided by hardware wallets outperform all kinds of hot software wallets and other types of offline cold storage devices as of today. It is recommended that if you are planning to hold a significant amount of cryptocurrencies, invest in a hardware wallet.
Alberto is the originator and primary contributor for this blog. He is an electrical engineer, tech and crypto enthusiast. Likes to learn and help others understand the amazing world of Bitcoin and cryptocurrencies.